Bank Rates Topping 25% Can’t Quell Peso Exodus: Argentina Credit

In his first week as Argentina’s central bank president, Alejandro Vanoli is doing little to restore confidence in the nation’s currency.

He left interest rates largely unchanged at the bank’s weekly debt auction on Oct. 7, failing to boost the appeal of peso-denominated securities at a time when a 40 percent rate of inflation fuels record demand for dollars. Yields on the shortest-dated notes, a benchmark for deposit and lending rates, rose just 0.3 percentage point to 26.86 percent.

Vanoli, who replaced Juan Carlos Fabrega on Oct. 1, is signaling he’s unlikely to boost benchmark rates to clamp down on living expenses and ease a rush for dollars that’s caused foreign reserves to plummet to an eight-year low, said Axis Inversiones. Fabrega, who carried out the biggest devaluation in 12 years and pushed up rates to a decade high, resigned after President Cristina Fernandez de Kirchner criticized the institution for allegedly leaking information.

“It’s an indication that Vanoli’s going to try to avoid making big changes,” Carlos Planas, a money manager at Axis, which oversees the equivalent of $55 million including central bank notes, said by telephone from Buenos Aires. “If inflation remains at these high levels and interest rates remain fixed, they won’t be sufficient to contain the demand for dollars.”

Dollar Purchases

At the auction, the first one under Vanoli, yields on the central bank’s longest-dated notes rose even less, climbing 0.14 percentage point to 29.29 percent.

The rate still isn’t enough to keep up with consumer prices that surged 40 percent in the 12 months through August, according to estimates gathered by opposition lawmakers.

Argentines, whose dollar purchases at the official rate of 8.4629 pesos are controlled by the government, have turned to the black market to acquire U.S. currency as a store of savings. The greenback reached a record 15.95 pesos on Sept. 24.

In his first meeting with executives from the nation’s banks, Vanoli said he’ll apply a strict control over foreign-currency rules, according to a statement from the monetary authority Oct. 6. Vanoli said in October 2013 that posting the price of the dollar in the black market is tantamount to publishing the price of cocaine.

Government Investigation

Vanoli, a former securities regulator, made his most recent comments after Fernandez said in a Sept. 30 speech that she would launch an investigation into arbitrage trading in the so-called blue-chip swap market, where Argentines obtain foreign currency by buying and selling assets in pesos and dollars. A day earlier, the peso had reached a record 15.04 per dollar in the blue-chip market.

The peso in the blue-chip swap climbed 3.2 percent to 13.3974 per dollar at 11:45 a.m. in New York, according to a Bloomberg index.

Vanoli, the central bank’s fourth president in five years, is seeking to put the onus on financial institutions to increase deposit rates and boost savings in pesos, according to Credit Suisse Group AG.

Two days after Vanoli’s appointment, the central bank adopted measures that require banks to boost the minimum rate for short-term certificates of deposit to 87 percent of the rate the central bank pays on its notes, which are known as lebacs. The measure lifts the minimum rate on 30-day CDs to about 23 percent from 18 percent to 20 percent, according to Federico Rey Marino, an analyst at Raymond James Financial Inc.

‘More Expensive’

“Hiking the CD rate is aimed at making savings in CDs more attractive than buying dollars,” Daniel Chodos, a strategist at Credit Suisse, said in an e-mailed response to questions. “At the same time, they avoid hiking benchmark rates that would make lending more expensive” and hurt economic activity, he said.

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While Fabrega’s devaluation and rate increases helped slow the decline in reserves and rebuild trust among investors, the policies helped crimp growth in South America’s second-biggest economy. In a speech Sept. 30, Fernandez said there was evidence that the central bank released information to lenders about a new policy obliging them to lower their foreign currency holdings. Fabrega attended the speech that took place in the presidential palace.

Andres Azicri, managing director at New York-based investment bank ACGM Inc., said that while Vanoli may make reviving growth his priority, he may be forced to adopt measures to bolster the peso and stem inflation.

‘So Concerned’

“Eventually the only consistent way of combating the depreciation in the peso in the informal market is by raising interest rates into territory that’s closer to expected inflation,” he said in an e-mailed response to questions.

The central bank under Vanoli is likely to avoid raising rates to control the exchange rate, according to Barclays Plc.

“The government thinks or believes that through more intervention in currency markets they will be able to contain potential exchange rate instability,” Sebastian Vargas, an economist at Barclays, said by telephone from New York. “They’re not so concerned at this juncture.”